Citing "excessive volatility ... due to international and domestic developments during the last month", the central bank said it planned short-term extra policy-tightening steps through open market operations.

It skipped its usual fixed-rate repo auction and held five $50 million forex-selling auctions, saying it would continue such sales whenever necessary. It said it would also intervene directly in the foreign exchange market if needed.

Two weeks of demonstrations against plans to redevelop an Istanbul park have spiraled into violent anti-government protests across the country, fuelling losses in Turkish assets.

Turkish Prime Minister Tayyip Erdogan has also unsettled some international investors with strong condemnation of what he sees as market speculation.

It has all added to existing pressure on asset markets in general brought on by uncertainty over the outlook for U.S. Federal Reserve money-printing policies.

"The central bank is drawing a line in the sand after recent lira weakness. Along with most (Europe, Middle East and Africa)currencies, the lira has been under intense pressure since the Fed discussed a potential tempering of quantitative easing," said Guillaume Salomon, a strategist at Societe Generale.

"Domestic tensions have not helped either ... We believe that the market should prepare itself for much higher short-term rates as the central bank tries to stabilize the lira."

The lira firmed after the central bank announcement of monetary tightening, having slumped to its weakest level against a euro/dollar basket since October 2011 in early trade. It stood at 2.1997 against the basket by 1446 GMT, having weakened to 2.22 earlier.

But the cost of insuring Turkish debt against default - a gauge of investors' political concern - rose to a 10-month high, according to Markit data.

Benchmark two-year government bond yields also climbed, rising to 6.82 percent from 6.50 percent on Monday in thin volume. The yield on Turkey's 10-year bond, due March 8, 2023, climbed to above 8 percent from 7.50 percent earlier on Tuesday as investors sold long-term debt. Shares were 1.76 percent down on the day.

"POSITIVE SURPRISE" ON GROWTH

Riot police fired water cannon and teargas at protesters who threw stones and fireworks in Istanbul's Taksim Square on Tuesday, as the police entered the square for the first time since the start of June.

Erdogan called on protesters to withdraw from Gezi Park next to the square. He said the wave of anti-government demonstrations were part of a deliberate attempt to damage Turkey's image and economy.

Ratings agency Moody's said on Monday that the protests across Turkey will weigh increasingly on its credit rating the longer they last and that they have heightened risks to the country's balance of payments.